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New Economic School
CORPORATE FINANCE II
(Financial contracting and corporate governance)
Module 4, 2010–2011
SYLLABUS
Professor:
Sergey Stepanov ([email protected])
Assistants:
Sergey Vorontsov ([email protected])
Summary
Corporate Finance II is complementary to Corporate Finance I. Corp. Fin. I and Contract Theory are
prerequisites for Corp. Fin. II.
Corp. Fin. II will focus on the issues of financial contracting and corporate governance. It will
discuss the ways in which financial contracts (financial structure) and control mechanisms (i.e.
corporate governance) should be designed so as to mitigate the conflicts between insiders and
outsiders in a firm and maximize the overall efficiency of a firm’s decisions. We will also look at
how the market for corporate control (takeovers) helps (or fails) to ensure that firms are governed by
the most able managers (or controlling owners) and that their incentives are best aligned with
shareholders’ interests. Furthermore, we will discuss why ownership structures of firms, corporate
governance mechanisms and overall financial development substantially differ across countries,
focusing on the role of institutions.
Grading
There will be a midterm (weight 40%) and a final exam (weight 60%).
Course materials
There is no single textbook for the course, but many topics are covered well in [1] and [2]. We will
mainly use these two books and the most important papers for each topic directly. Some sections of
[3] dealing with financial contracting are also useful. Other necessary materials will be handed out in
class or made available at my.nes.ru.
1. Tirole, Jean, 2006, The Theory of Corporate Finance, Princeton University Press.
2. Hart, Oliver, 1995, Firms, Contracts, and Financial Structure, Oxford University Press.
3. Bolton, Partick, and Mathias Dewatripont, 2005, Contract Theory, MIT Press.
Course outline with the corresponding chapters in books in brackets and references to specific
papers (the list is exhaustive, we will not cover all of them in detail)
1. Introduction ([1], ch. 1). Agency problem and the notion of pledgeable income.
Tirole, Jean, 2001, "Corporate Governance", Econometrica, 69, 1: 1-35
2. Agency problems of outside finance ([1], ch. 3-4, [2], ch. 6). Implications for optimal capital
structure
Harris, Milton and Artur Raviv (1991), "The Theory of Capital Structure", Journal of Finance,
46:297-355. (survey)
Jensen, Michael and William Meckling, 1976, "Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure", Journal of Financial Economics, 3:305-360
Jensen, Michael (1986), "Agency Costs of Free Cash Flow, Corporate Finance and Takeovers",
American Economic Review, 76:323-329
Rene Stulz, 1990, “Managerial Discretion and Optimal Financing Policies,” Journal of Financial
Economics, 26: 2-27.
Zwiebel, Jeffrey, 1996, "Dynamic Capital Structure Under Managerial Entrenchment," American
Economic Review, 86: 1197-1215.
Myers, Stewart, 1977, "The Determinants of Corporate Borrowing", Journal of Financial Economics,
5:147-175.
Hart, Oliver D., and John Moore, 1995, "Debt and Seniority: An Analysis of the Role of Hard
Claims in Constraining Management," American Economic Review, 85: 567-585.
3. Asymmetric information and choice of capital structure ([1], ch. 6).
Harris, Milton and Artur Raviv (1991), "The Theory of Capital Structure", Journal of Finance,
46:297-355. (survey)
Myers, Stewart C. (1984), "The Capital Structure Puzzle," Journal of Finance, 39:575-592.
Myers, Stewart C., and Nicholas Majluf (1984),"Corporate Financing and Investment Decisions
When Firms Have Information That Investors Do Not Have," Journal of Financial Economics,
13:187-221.
Leland, Hayne and David Pyle (1977), "Information Asymmetries, Financial Structure and Financial
Intermediation", Journal of Finance, 32:371-388.
Ross, Steven (1977), "The Determination of Financial Structure: The Incentive Signalling
Approach", Bell Journal of Economics, 8:23-40.
Myers Cap Structure, Financing of Corporations
4. Costly state verification with single and multiple investors ([1], ch. 3.7; [2], ch. 5.appendix)
Gale, Douglas, and Martin Hellwig (1985), "Incentive Compatibility Debt Contracts:The One Period
Problem," Review of Economic Studies, 52:647-663.
Townsend, Robert (1979), "Optimal Contracts and Competitive Markets with Costly State
Verification," Journal of Economic Theory, 21:417-425.
Winton, Andrew (1995), "Costly State Verification and Multiple Investors: The Role of Seniority,"
Review of Financial Studies, 8:91-123.
5. Optimal financial contracts and allocation of control ([1], ch. 3.8, 10; [2], ch. 5, 6)
5.1. Allocation of control between insiders and outsiders.
Aghion, Philippe, and Patrick Bolton, 1992, "An Incomplete Contracts Approach to Financial
Contracting," Review of Economic Studies, 77:388-401.
Hart, Oliver D., and John Moore, 1994, "A Theory of Debt Based on the Inalienability of Human
Capital," Quarterly Journal of Economics, 109:841-879.
Hart, Oliver D. and John Moore, 1998, "Default and Renegotiation: A Dynamic Model of Debt",
Quarterly Journal of Economics, 113: 1-42.
Bolton, Patrick, and David S. Scharfstein, 1990, "A Theory of Predation Based on Agency Problems
in Financial Contracting," American Economic Review, 80:94-106.
Diamond, Douglas W, 1991, "Debt Maturity Structure and Liquidity Risk," Quarterly Journal of
Economics, 106: 709-37.
Kaplan, Steven and Per Strömberg, 2003, “Financial contracting theory meets the real world:
Evidence from venture capital contracts”, Review of Economic Studies 70(2), 281-316.
5.2. Allocation of control between different investors and diversity of outside claims
Hart, Oliver, 2001, "Financial Contracting", Journal of Economic Literature, 39: 1079-1100.
Berglöf, Erik and von Thadden, Ernst-Ludwig, 1994, "Short-Term versus Long-Term Interests:
Capital Structure with Multiple Investors," Quarterly Journal of Economics, 109: 1055-1084.
Bolton, Patrick, and David S. Scharfstein, 1996, "Optimal Debt Structure and the Number of
Creditors," Journal of Political Economy, 104:1-25.
Dewatripont, Mathias, and Jean Tirole, 1994, "A Theory of Debt and Equity: Diversity of Securities
and Manager-Shareholder Congruence," Quarterly Journal of Economics, 109:1027-1054.
6. Corporate governance ([1], ch. 1, 11; [2], ch. 8)
6.1. Agency problems and mechanisms of corporate governance (overview)
Becht, Marco, Patrick Bolton and Ailsa Röell, 2002, "Corporate Governance and Control", ECGI Finance Working Paper No. 02/2002
Shleifer, Andrei, and Robert Vishny, 1997, "A Survey of Corporate Governance", Journal of
Finance, 52: 737-783.
6.2. Boards of directors
Adams, R., B. E. Hermalin, and M. S. Weisbach. 2010. The Role of Boards of Directors in Corporate
Governance: A Conceptual Framework & Survey. Journal of Economic Literature, 48, 1, pp: 58107(50)
Hermalin, Benjamin E. and Weisbach, Michael S., “Boards of Directors as an Endogenously
Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, Vol. 9, No.
1, April 2003, http://ssrn.com/abstract=794804
Yermack
Coles, Jeffrey L., Naveen D. Daniel, and Lalitha Naveen, 2008, “Boards: Does One Size Fit All?,”
Journal of Financial Economics, 87 (2), 329–356.
Hermalin, B. E., and M. S. Weisbach. 1998. Endogenously Chosen Boards of Directors and Their
Monitoring of Management. American Economic Review 88: 96–118.
Yermack, David, 1996, “Higher Valuation of Companies with a Small Board of Directors,” Journal
of Financial Economics, 40 (2), 185–212.
6.3. Transfers of corporate control (takeovers)
Burkart, Mike, and Fausto Panunzi, 2006, “Takeovers,” ECGI Finance Working Paper #118/2006
(survey)
Scharfstein, David, 1988, The Disciplinary Role of Takeovers, Review of Economic Studies 55,
185-99.
Shleifer, Andrei, and Lawrence H. Summers, 1988, Breach of Trust in Hostile Takeovers, in Alan J.
ed Auerbach, ed.: Corporate Takeovers: Causes And Consequences (University of Chicago Press,
National Bureau of Economic Research Project Report series, Chicago and London).
Grossman, Sanford J., and Oliver D. Hart (1980), "Takeover Bids, the Free Rider Problem and the
Theory of the Corporation," Bell Journal of Economics, 11:42-64.
Grossman, Sanford J., and Oliver D. Hart (1988), "One Share One Vote and the Market for
Corporate Control," Journal of Financial Economics, 20:175-202.
Bebchuk, Lucien A. (1994), "Efficient and Inefficient Sales of Corporate Control," Quarterly Journal
of Economics, 102: 957-993.
Burkart, Mike, Denis Gromb, and Fausto Panunzi (1998), "Why Higher Takeover Premia Protect
Minority Shareholders," Journal of Political Economy, 106:172-204.
Burkart, Mike, Denis Gromb, and Fausto Panunzi (2000), "Agency Conflicts in Public and
Negotiated Transfers of Corporate Control," Journal of Finance.
6.4. Ownership concentration and corporate control
Shleifer, Andrei and Robert W. Vishny, (1986), "Large Shareholders and Corporate Control",
Journal of Political Economy, 94: 461-488.
Burkart, Mike, Denis Gromb, and Fausto Panunzi (1997), "Large Shareholders, Monitoring and the
Value of the Firm," Quarterly Journal of Economics, 113:693-728 (see also [1], ch. 10.6)
Burkart, Mike, and Fausto Panunzi, 2005, "Agency Conflicts, Ownership Concentration and Legal
Shareholder Protection", forthcoming in Journal of Financial Intermediation.
Pagano, Marco, and Ailsa Roell, (1998), "The Choice of Stock Ownership Structure: Agency Costs,
Monitoring and the Decision to Go Public," Quarterly Journal of Economics, 113:187-225.
7. Corporate governance and financial development around the world
Denis, Diane K., and John McConnell, 2003, "International Corporate Governance", Journal of
Financial and Quantitative Analysis, 38: 1-36.
Shleifer, Andrei, and Daniel Wolfenzon, 2002, "Investor Protection and Equity Markets", Journal of
Financial Economics, 66: 3-27. (survey)
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, 2000, "Investor
Protection and Corporate Governance", Journal of Financial Economics, 58: 3-27.
Burkart, Mike, Fausto Panunzi, and Andrei Shleifer, 2003, "Family Firms", Journal of Finance, 58:
2173-2207.
Dyck, A., and L. Zingales, 2004, "Private Benefits of Control: An International Comparison",
Journal of Finance 59: 537-600.
Morck, Randall and Yeung, Bernard Yin, "Special Issues Relating to Corporate Governance and
Family Control" (September 2004). World Bank Policy Research Working Paper No. 3406
Morck, Randall, Wolfenzon, Daniel and Yeung, Bernard Yin, "Corporate Governance, Economic
Entrenchment and Growth" (August 2004). NBER Working Paper No. W10692
Holderness, C. G. 2009. The Myth of Diffuse Ownership in the United States. Review of Financial
Studies 22:1377–408.
Spamann, H. The ‘Antidirector Rights Index’ Revisited. Review of Financial Studies, forthcoming.
8. Corporate governance in a weak institutional environment
Berglöf, Erik, and Ernst-Ludwig von Thadden, 2000, "The Changing Corporate Governance
Paradigm", in Pleskovic and Stiglitz (eds.), World Development Conference, The World Bank.
Berglöf, Erik, and Stijn Claessens, 2004, "Enforcement and Corporate Governance", World Bank
Policy Research Working Paper 3409.
Durnev, Artyom, and E. Han Kim, 2005, "To Steal or Not to Steal: Firm Attributes, Legal
Environment, and Valuation," Journal of Finance, forthcoming.
Klapper, Leora F., and Inessa Love, 2004, "Corporate Governance, Investor Protection, and
Performance in Emerging Markets", Journal of Corporate Finance, 10: 703-728.
Lins, Karl V., "Equity Ownership and Firm Value in Emerging Markets" (August 5, 2002),
http://ssrn.com/abstract=214909
Stulz, René M., 2005, “The limits of financial globalization,” Journal of Finance, v60(4): 1595-1638.
Durnev, Art, and Larry Fauver, 2007, “Stealing from Thieves: Firm Governance and Performance
when States are Predatory,” working paper.
Durnev, Art and Guriev, Sergei M., 2007, "The Resource Curse: A Corporate Transparency
Channel", working paper
9. Corporate governance in Russia
Olga Lazareva, Andrei Rachinsky, and Sergey Stepanov, 2007, “A survey of corporate governance
in Russia,” CEFIR/NES working paper #103.
Guriev, Sergei, and Andrei Rachinsky, 2004, “Ownership Concentration in Russian Industry”,
CEFIR working paper #45.
Black, Bernard, Inessa Love, and Andrei Rachinsky, 2005, Corporate Governance and Market Value
of Russian Firms: Time Series Evidences from Russia, CEFIR working paper #53.
Dyck, Alexander, Natalya Volchkova, and Luigi Zingales, 2005, “The Corporate Governance Role
of the Media: Evidence from Russia”, CEFIR working paper #54.